Watch this space in 2017


As with most political issues, the following few questions are inter-related: Turnbull’s future may well depend on the economy, on whether or not a new conservative party forms and whether there is a Trump-inspired trade or currency war between China and the US; our economy may well depend on what Trump does in relation to China, let alone whether Morrison displays any understanding of economics; and so on.

Will the Australian economy improve or continue to stagnate?

In December we had the news that the Australian economy had contracted by 0.5% in the September quarter. Most of the pundits do not expect that to be repeated in the December quarter, which means we would avoid a recession (which requires two consecutive quarters of contraction).

On the other hand, commodity prices are still weak, although better than they were, and if a US/China trade war erupts may weaken again. Every reduction in commodity prices flows through a large segment of our economy, affecting the supporting businesses and often, through reductions in the workforce, local businesses, and the impact then multiplies ultimately affecting government revenue. The Christmas season may help us avoid a ‘technical recession’ (that magical six months) but will we see another quarter or two of contraction during 2017?

This year will also see the end of car manufacturing in Australia. That has implications across a number of industries and, as some commentators have noted, it has been car manufacturing that has driven much of the technological innovation in the manufacturing sector. Turnbull’s ‘innovative and agile’ economy may become a little more wobbly as a result.

The end of car manufacturing will lead to increased unemployment, not only in the car industry but in the companies that previously relied on providing parts to that industry. Couple that with the lack of wages growth (the lowest since records have been kept) and the government will be losing more in income tax revenue and paying more in unemployment benefit, making it that much more difficult to achieve its stated aim of bringing the budget back to surplus.

The economy did not go well in 2016 and the prospect for 2017 isn’t all that good. Even in his MYEFO in December, Morrison lowered the estimated rate of economic growth for both financial year 2016‒17 and 2017‒18. The new forecast rate of growth isn’t even enough to absorb new entrants into the workforce (usually accepted as about 3%) and that is without considering that the economic growth forecasts for the past few years have proven optimistic. Certainly don’t expect a boom year but how bad it may be we will have to wait and see.

Will Scott Morrison ever understand the budget?

Ever since the Abbott/Turnbull government was elected, and returned last year, the government’s budget deficit has continued to grow. Low commodity prices, over which the government has no control, and slow wages growth, which government policies have actually promoted, have not helped.

Morrison, however, continues to focus on government spending rather than revenue raising. Although he has backed away somewhat from his earlier statement that the government had a spending problem not a revenue problem, his actions have remained focused on reducing spending. (I won’t get into the MMT argument here.)

The government has ignored the opportunity to borrow money at historically low interest rates to fund infrastructure. Although it is now talking more about infrastructure, it appears it may be at a time when interest rates could be on the rise again — US interest rates are certainly likely to rise during 2017 which may force some other countries to raise theirs in order to maintain their currency.

Our Reserve Bank still has capacity to reduce interest rates (although such reductions have done nothing to stimulate the economy so far). If it does reduce interest rates, and the US increases rates, the Australian dollar is likely to drop in value. The government will claim that helps exporters but it will increase the price of imports which may not help our ‘terms of trade’ and will also potentially lower our living standards by making imported consumer goods more expensive at a time when wages are barely growing — not something that would enhance the government’s electoral appeal.

Turnbull’s ‘innovative and agile’ economy and the promise of company tax cuts — which he continues to espouse despite it being unlikely to pass the Senate — are not issues that inspire the average voter. If any benefits are to flow to the economy from such ‘policies’, they will be well beyond the next election, so Turnbull and Morrison can’t look there for short term budget improvements but they seem to have no other plans to help the economy and by implication the average voter.

Will Morrison and Turnbull finally concede that they also need to raise revenue in the next budget? That will be one to watch although I expect that, if so, they will do their best to obscure the fact.

Will there be a new conservative party?

Cory Bernardi is creating a nation-wide conservative movement but not yet formally a new conservative party. It will be interesting to watch where that goes in 2017 and whether it turns into a fully-fledged political party.

The Liberal party will no doubt do its best to stop it happening as it would further split the conservative vote, although that may not be an issue until the next federal election. If such a party comes into being during 2017, it could have serious implications for the government because it has only a one seat majority in the House of Representatives. Even if only one or two Liberal or National members in the House were attracted to the new party that would create a situation where not only does the government have to negotiate with crossbenchers in the Senate but also in the House to have legislation passed. Although the conservatives already seem to wield considerable influence in the Liberal party room, if they held the balance of power in the House, that could actually increase their influence. That may even be a consideration in the formation of such a party: if they wish to create Australia in their conservative image, having a couple of members in the current House could help them achieve that, or force Turnbull to another election earlier than he would wish.

The electoral implications are that the conservative vote could be split between the Liberals, One Nation, the Nationals and the new party, leaving open the possibility that Labor would lead on first preference votes in more House of Representative seats and have an improved chance of winning them. And it is likely that a proportion of the preferences for a new conservative party would flow to One Nation (and vice versa) before they flowed to the Liberals, so it would be very interesting.

The timing of the creation of such a party could be determined by the election timetable. The earliest a federal election can be called, other than another double dissolution, is August 2018 but such a party may like to test its electoral appeal at a state election. WA has an election in March which now seems too soon to establish the party and create an organisation geared for an election. SA goes in March 2018 and the earliest Queensland and Tasmania can go to an election is April 2018 and May 2018 respectively: so to be ready to contest one of those the new party would have to be created no later than the latter half of this year.

Will Turnbull remain prime minister?

Personally I think he will in 2017 but 2018 may be a different story — unless he voluntarily decides to toss in the towel, deciding it is just too difficult to govern his fractious coalition and cope with the constant negotiation with the Senate crossbenchers (and potentially House cross benchers) to have legislation passed.

As indicated above the earliest an election can be called is August 2018. I doubt he would dare have another double dissolution before then as that would not go down well with the electorate (but if he loses members in the House to a new conservative party he may be forced to). But if the economy continues to stagnate, or underperform as a result of a US/China trade war, that will reflect on the government, as economic performance always does even if the government has little real control over many aspects of the economy, and he may well foresee that he cannot win the next election — although he could leave an election as late as possible (May 2019) in hope that things will improve. Much will depend on his own vanity and desire to be prime minister or whether he sees a short stint as having achieved his ambition.

Another key factor will be the possible creation of a new conservative party. For Turnbull that could be both a blessing and a curse. A ‘curse’ for the reasons described above but a ‘blessing’ if it freed him to express more of his liberal philosophy rather than the conservative agenda. A Malcolm Turnbull who again expressed liberal views would probably reignite his support in the electorate but then both he and the Liberal party would need to decide what to do about it. While a more liberal Turnbull may attract votes, it may be just as difficult to form government if a new conservative party also attracts votes: in fact, a more liberal Turnbull may draw some votes from Labor and the Greens while some of the Liberal base goes to the new conservative party — that would really redefine the political landscape in Australia. It could also lead to a minority government and I doubt Turnbull would want to be in that situation.

Turnbull will have much to ponder particularly in the latter half of the year unless there is an unlikely improvement in the economy and unless the Liberal party is able to forestall the formation of a new conservative party or even the growth of conservatism in its own ranks. Will Turnbull want to continue to lead unless those things come to pass? Will the conservatives in the party room decide to move against him for a genuinely committed conservative leader rather than one who panders to them only to keep the job? After all, the result of the 2016 election means Turnbull does not lead from a position of strength.

Abbott has spoken against the rise of a new party and will some in the Liberal party see Tony Abbott as the one who can provide a bulwark against defections to a new conservative party or even its creation? Although perhaps not intended, the pressure created by threats of a new conservative party may well enhance the chance of an Abbott return to counter it.

Will Trump really threaten the world as we know it?

While Trump may cause problems for the US with his apparently contradictory promises to halve the company tax rate, spend billions on infrastructure and improve the US budget bottom line, their impact on Australia will play out indirectly through the international financial system. Of more direct consequence to Australia could be his trade and foreign policies, particularly relating to China.

Trump may wish to be more friendly with Putin and Russia but he will have to remember that China and Russia are still close, if not as close as once they were. He also sees North Korea as a threat but will have little scope to do anything about it without Chinese support although he thinks that using trade as a lever may also force China to act. He may think he is a good negotiator but he and his appointees will run up against expert negotiators and some, like the Chinese, are certainly willing to play the ‘long game’, something which Trump and his ilk seem unable to do.

Australia may continue sitting on the fence and use ‘diplomatic speak’ to suggest that differences should be resolved diplomatically but that may become more difficult under a Trump presidency. Will Australia be forced to side with either the US or China on some key issue? That will be a difficult position for Australia given that they are two of our biggest trading partners.

On trade, Trump is keen to scrap US involvement in the TPP which will effectively be its demise. Turnbull has consistently insisted that the TPP is essential to Australia’s future, so what will its demise mean for that future? It will be another piece of Turnbull’s economic plan that fails to materialise — which in the case of the TPP may not be a bad thing.

The main concern is a potential trade war between China and the US. If the US becomes more protectionist and imposes tariffs on Chinese imports, that may reduce Chinese production which in turn will reduce demand for Australian resources, with all the economic consequences that implies. It could also mean that China sends more cheap goods to Australia that formerly went to the US and that could further undermine what manufacturing we have left unless we also declare that they are ‘dumping’ goods in Australia and impose punitive tariffs which will essentially be biting the hand that feeds us. If this scenario unfolds, Australia will be in a difficult place economically and in how to respond to the challenges it throws up.

In turn, it may also mean that China pays more attention than it already does to developing nations in Africa and the Pacific and that will have foreign policy implications for Australia. We have been cutting our foreign aid budget but if China redirects its effort, we may be forced to do more in that area or accept further growth of Chinese influence in the region — which way will we go?

Conclusion

The above are just a few of the questions that could arise during 2017.

Others include:
  • Will the housing bubble burst and the construction boom come to an end?
  • What will be the effect if we lose our AAA credit rating, not just for government but for our banks?
  • How will Australia deal with Brexit and the need to negotiate separate trade deals with the EU and the UK?
  • How will we address problems meeting our climate change commitments under the Paris agreement?
And of course there are the perennials such as how we handle refugees and Australian Muslims which will be influenced by the rise of the conservative forces.

It may prove to be an interesting year both here in Australia and internationally.

What do you think?
What are your answers to the questions?

What other questions will Australia face in 2017?

Let us know in a comment below. We may use some of your suggestions for future articles.


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Comments (6) -

  • John Kelly

    1/16/2017 8:31:13 AM |

    To answer your questions....no, the housing bubble will continue and perhaps expand further. The loss of our AAA credit rating won't make any difference to anything. Brexit won't be finalised this year and any trade deal that might result when it does will not materialise until sometime in 2019 or 2020....perhaps. Something tells me this government doesn't give a hoot about Paris.

  • Ken

    1/16/2017 9:27:58 AM |

    Thanks John

    They were my minor questions at the end and I basically agree with your answers, although I did hear some commentators suggesting that the loss of the AAA cradit rating could lead banks to increasing thir interest rates irrespective of what the Rerserve Bank does - tightening access to money in that way in an already stagnant economy would not help.  Certainly agree that the majority of government members would be in favour of ignoring the Paris agreement.

  • Golly

    1/17/2017 5:33:55 AM |

    I read and read your article before composing a very long reply then realised I was rewording your thoughts.
    My brief contribution therefore is that Turnbull's government will be known as the "fingers crossed" government carrying buckets of self-interest with feet planted somewhere far removed from where many many Australians find themselves.

  • Ken

    1/18/2017 1:37:52 PM |

    thanks Golly

    Agree that it is a 'fingers crossed' government just hoping for the best because it certainly has no clear plan capable of boosting the economy and through that the situation of the average voter.  As you suggest, what plans they have seem to involve bolstering the wealth of the already wealthy and taking money from those at the bottom to do it - not a way to win votes and it just puts more pressure on Turnbull to bail out or on his conservatives to get rid of him.

  • Silverlady

    1/26/2017 12:31:35 PM |

    "Choose to be optimistic, it feels better."
    In these times try to remain positive and hope that the more socially progressive political parties put much more concentrated effort into the formulation and wide discussion of their alternative policies. "It's time." (again)

  • Ken

    1/28/2017 9:06:42 AM |

    Silverlady

    Welcome to TPS and thanks for the comment.  Being optimistic is difficult in these political times.  Discussing alternative policies is certainly required and, yes, it's time (again).

Comments are closed